Assignment
Section One : Case Study Evaluation : Max 1,000 words (plus appendices as required)
Instructions:
Please read the scenario described below carefully, noting the key financial information and the attitudes and needs of the subject.
You are required to draw up a pensions action plan. In order to do this successfully you will need to :
• Carefully investigate the products and circumstances detailed.
• Investigate the cost of / returns from current and suggested products, taking account of current and expected future economic conditions.
• Carry out calculations necessary to support your pension recommendations.
• Take account of tax efficiency and the affordability of current and suggested future actions.
Your financial plan should be holistic ie should address the relevant areas with regard to how they impact on each other and should address the overall net position after your recommended actions are implemented.
The key aspects to address in your preparation are:
WHAT are the issues?
HOW should they address the issues? (ie identify the strategies they need to deploy and the products they need to use to meet their objectives)
WHEN should they take specific actions? (ie prioritise)
WHY is the suggested action the best thing to do? (ie justify your choices)
Case Scenario:
Harry is 60. He is Financial Controller of a small private company on a salary of £74,000per year . He is married to Jenny, who is 64 and already retired. She has a small occupational pension from the civil service and her full state pension, with an overall pension income of £178 per week. Jenny is not in the best of health. They paid off their mortgage when they sold their family home and moved to a 3 bedroom bungalow. Harry would now like to spend more time Jenny, so he has come to the view that he should reduce his work hours and ease into retirement over the next 5 years. His company are happy to support him in that plan. He will reduce work hours and therefore his earnings, by 25% from January 2013, then go down to 50% salary from January 2014 until 2017. He has a number of pensions and assets that he might use to help him reduce his work based earnings without loss of lifestyle as he withdraws from corporate life, and aims to retire entirely at age 65. His pensions and assets are made up of:
Investments:
Aberdeen Emerging Markets Fund - Initial Investment £15,000 in 2007.Current value £26,850.
Pensions:
• State Pension : 38 years contributions
• Private Personal Pension ( 1988 - present):
Current Fund value : £187,000. 10% annual gross contribution
• Deferred Occupational Pension (Defined Benefit)
Salary on leaving: £34,000 + 2%pa increase since 1988. Qualifying years : 14/60. Scheme retirement Age: 65
• Group Personal Pension (1996-present)
Current Fund Value : £78,000. Employer contribution 6% Employee contribution 8%
• Rental property
Current Market Value £260,000. Mortgage outstanding - £120,000 . Mortgage terms : Interest Only, terminating 2014.
Harry's monthly expenditure amounts to 80% of his take home pay, the surplus is placed into his savings account with Britannia Building Society, which currently has a balance of £24,500 . His rental income pays the mortgage on the property and associated costs, and leaves a surplus of £90pm net income.
Harry is worried about his asset values. He has swapped his pension funds largely out of equities and into bonds and cash funds, but his rental property has fallen in value since 2010 and his investment fund values have been volatile over the last 5 years in particular. He is worried that his assets may continue to fall in value over the next 5 years and he is concerned that his pension plans may be unrealistic in the current climate. He wonders how he can afford to cut his earnings and draw some income out of his pensions whilst still preserving a reasonable income expectation later in life when he stops work completely. He doesn't know whether to buy annuities, use income drawdown or sell his property and funds for cash to produce income, or whether to look at some combination of all of these options. He really needs your help to advise him of the options and risks involved.